Will the unity of the 27 crack?

Some British politicians believe that the 27 will divide during the Brexit trade negotiations, because of their differing economic interests. But disagreements between the 27 are minor, thanks to Theresa May's red lines.

To date, the EU’s position on Brexit has held firm. During the talks over the terms of the divorce, the interests of the member-states were aligned and the UK could not rely on dissenting voices to soften the hard line pushed by Germany and France. But in the second phase of the Brexit negotiations, the differing economic and political interests of the various member-states may emerge. Some believe this may threaten the unity of the 27.

This policy brief argues that the EU will continue to stick together. The UK will not be offered a ‘sweetheart deal’. The only way for Britain to maintain a comparable level of single market access to that which it enjoys today would be for Theresa May to soften her red lines and accept the accompanying overarching obligations. If she is unwilling to do so the UK should expect little more than a basic free trade agreement (FTA), which at its most ambitious would be of similar depth and scope to the early European visions of the Transatlantic Trade and Investment Partnership (TTIP), the ill-fated EU-US free trade agreement.

While the EU-27 economies are indeed exposed to Brexit, the majority of the 27 face small economic costs from the process. Germany’s economy is the most exposed, after Ireland, but it has proved one of the toughest countries in the negotiations. Apart from Ireland, Germany, the Netherlands, Belgium and tiny Malta, 2 per cent or less of the member-states’ GDPs are embedded in trade with the UK. While more exposed free trade advocates like the Netherlands might countenance a softer approach for economic reasons, the integrity of the single market remains an important concern and most member-states are unlikely to expend much political capital on the UK’s behalf.

The City of London’s status as Europe’s largest financial centre provides Britain with some leverage, but not as much as the UK appears to believe. Where Brexit poses risks to banks and businesses in the 27, the EU has the power to contain the fallout from a loss of access to the City by providing equivalence, either for a temporary period after the transition to give financial markets time to adjust, or permanently. But the scope of that equivalence will be much more limited than the access provided by single market membership.

While a British offer of a preferential migration regime for EU citizens would certainly earn goodwill, officials in Brussels point out that, without EU law in operation in the UK, promises made now by the UK do not bind the hands of future governments. Future governments might choose a more restrictive migration regime.

One area the UK might find worth exploring is future budget contributions. The politics of the EU budget are going to be especially difficult in the next round of negotiations, and if the UK offered a significant sum, it might unlock some benefits in the negotiations over a free trade deal. However, these benefits would be constrained by the UK’s red lines on accepting EU rules, the jurisdiction of the European Court of Justice (ECJ) and free movement.